Regulations are a really big drag on US growth

When the Department of Commerce reported recently that the U.S. economy grew at an annual rate of only 0.5% during the first quarter of 2016, the White House attributed the meager growth in output to weakness in business investment and exports.

Yet there is another important institutional influence often overlooked — or conveniently ignored — that negatively affects the country’s overall economic performance: the increasing impact of government regulations.

It should be explicitly recognized that there is an increasingly significant cumulative cost to the American economy of a burgeoning regulatory state. Credit: Flickr/mag3737

In a 22-industry study released in April by the Mercatus Center at George Mason University, a group of researchers found that federal regulations created an economic drag on the U.S. economy amounting to an average annual reduction in GDP growth of 0.8%. What is unique about this study is that that it evaluates the cumulative costs of regulation over a long time period and examines the effect of federal regulations by considering a counterfactual experiment: What would have happened if federal regulations had been “frozen” at the levels that prevailed in 1980?

The study’s authors posit that the cumulative buildup of federal regulations over time leads to duplicative, obsolete, conflicting and even contradictory rules, and that the multiplicity of such regulatory constraints complicates and distorts executive decision-making concerning a firm’s planning for research and development, business expansion, investments in new equipment, and updating manufacturing processes.

Thus, because of the importance of innovation and productivity growth to the U.S. economy, these distortions have negative consequences for long-term economic growth in the U.S. The Mercatus research team calculated that the 0.8% annual drag on real GDP growth since 1980 due to the cumulative effects of regulation can be extrapolated into a 25% reduction in the size of the U.S. economy in 2012, or an economy that was $4 trillion smaller (nearly $13,000 per American) than it would have been in the absence of regulatory growth.

The federal government is not required to track total regulatory costs, although estimates of the regulatory burden on the U.S. economy range upwards of more than $2 trillion per year, or more than 10% of GDP. Not surprisingly, the Obama administration has shown a much greater appetite for expanding federal regulations than the previous Bush administration.

James Gattuso and Diane Katz of the Heritage Foundation, in the tenth installment of their “Red Tape Rising” reports (forthcoming May 2016), found that in the first seven years of the Obama administration through 2015, the executive branch enacted 229 major “economically significant” regulations (those anticipated to impose costs of $100 million or more) on America’s private sector.“Given the regulatory zeal of Team Obama, it should not be surprising that economic growth has averaged only 1.4 percent annually over the last seven years.”
In contrast, during the entire eight-year term of the previous Bush administration, there were only about half as many (126) such major regulations imposed on the private sector. Costwise, it has been estimated that the regulations enacted during Obama’s time in office now total $108 billion annually (in 2015 dollars), or 52% more than the $71 billion annual cost imposed by regulations during the eight years of the Bush Administration.

Given the regulatory zeal of Team Obama, it should not be surprising that economic growth has averaged only 1.4% annually over the last seven years. Further, Obama is the only president in modern history whose time in office didn’t include at least one year of economic growth at the 3% historical average.

Further, most studies that estimate regulatory costs focus exclusively on the burden of federal regulations. Therefore, if the costs of private-sector compliance with state and local government administrative rules were factored into the Mercatus Center analysis, the negative economic effects of all government regulations on the U.S. economy could easily exceed 1% of foregone annual GDP growth.

Moreover, the use of dynamic economic modeling to estimate cumulative regulatory effects has the potential to offer a more realistic appraisal of the full costs when legislators are considering regulatory actions. Too often, the negative effects of government regulations do not sufficiently capture the impact on stifling innovation in the private sector. In a developed economy like the U.S., such innovation is crucial for facilitating economic growth through improved business productivity and new product and process development.

While some regulation of the private sector is needed, it should be explicitly recognized that there is an increasingly significant cumulative cost to the American economy of a burgeoning regulatory state. When it comes to competing in the world economy and trying to restore economic growth in the U.S. to the 3% historical average, the connection between the increasingly costly regulatory burden being imposed on America’s private sector and the ongoing, mediocre national economic performance reflected in the anemic growth in the first quarter is reaching an important crossroads.

Hemphill is a professor of Strategy, Innovation and Public Policy at the University of Michigan-Flint and Senior Fellow at the National Center for Policy Analysis.

Perry is a professor of economics at the University of Michigan-Flint and a resident scholar at the American Enterprise Institute.

Discussion:
(14 comments)

I think this article gave quality insight to the real effects of the increasing government involvement in the private sector. I wouldn’t say that I am an anarch-capitalist but I am against almost all government in the private sector. This was good empirical evidence on the effects. Although, I do with that the actually studies cited were linked so I would be able to read them myself.

Per capita real GDP stats (rate of growth):
1960s — 35%
1980s — 25%
1990s — 21%
The last 15 years — 10% to 15%
_____________________________________
(1) ’60s are 40% better than the ’80s and 70% better than the ’90s; (2) comparing the difference between the ’80s and ’90s — is that due to regulations being a big drag on the U.S. economy? I don’t think so.

If you spend any time in global business development you would change your view. American companies are at a significant disadvantage because US regs also impact foreign partners. Manageable for a multinational but massively burdensome for everyone else….

I’ve spent time in continential Europe over the decades. I don’t think the regulartory environment in Europe through the decades (1960s to now) is any more favorable than what we have had in the U.S. — in fact, more likely to be the other way around.

Meanwhile, in another study, a group of researchers that analyzed the findings of this study came up with an interesting name for this study:
“How to shoot yourself in The Foot- And later cry about it!”
The study will be published shortly for your comment and enjoyment. Stay tuned.

I am sympathetic to the concern but disturbed that the likely impact of this “study” is to simply encourage those that oppose all regulation. Secondly a lot more information is needed before I buy that this is more than intuitively true. You say that some regulation is needed but never give a picture what that means. Many regulation targets are extremely important concerns. The notion that industry would take seriously worker safety or environmental concerns without some boundaries is absurd. Some are quite good and others have a horrid history. What does wise regulation look like? Without more details to validate your numbers and more importantly promoting what wise regulation looks like, this study is hard to support.

The answers to your doubts I believe are quite simple and can be stated in this way:
The moment that firms start moving their cash and production facilities overseas because they cannot operate locally because of excessive costs, regulation and/or red-tape, it’s time for the authorities to step in and fairly ask themselves: “why is this happening?, are we doing anything that may be incrementing this? and finally, what can we do to reverse this trend?

Ray’s comments are spot on. Perry & Hemphill are full-throated cheerleaders for..what exactly? More and greater innovation? Specific priorities for regulatory reform and why? What is offered: aged groans about ‘burdens of regulations’ with no context of cost burdens foregone, those that give rise to specific regulations. What’s the supposition: that regulators and political cliques impose regulations on private sector in order to collect ‘rents’ a/o to favor large corporations? because they’re misguided do-gooders? Perhaps the GMU Mercatus paper explores the dynamics of regulation origin, forming, and enforcing. If so, it’s not even hinted in P & H’s essay above. Data bearing on those are needed: GDP is a very limited national transaction meter that so far doesn’t reflect many main human interests and points of pain and pleasure. Anyhow, what’s so alarming about a long-term 1% per year national GDP growth rate? or at least one that’s no greater than the rate of growth of our ‘working age’ population? Why not aim for such a long-term central tendency for our species? the challenge to pioneer adaptations?

I did want to make a followup comment that I actually would welcome this type of study if it is followed up getting into the weeds of what intelligent regulation looks like on a micro level. How do we encourage this type of approach?

We can already see by one of the comments that the typical reaction is that all government regulation is crap and should be opposed. AEI had the real potential rising above the debate to offer a more thoughtful conservative position, rather than just reinforcing a knee jerk or blinders on libertarian philosophy.

Sometimes proper regulation can actually stimulate competition. In the 1980’s a long distance phone call was a major budget item for a family. The AT&T breakup not only forced the divesture of local phone service but place requirements for open access to vendors offering local and long distance service. What if the monopolies in health care were addressed in the same way to force break and require access to common services such as not only labs but perhaps even EHR systems. Add to that requirements for open and fair pricing with the goal to allow small providers to compete and proliferate. We are foolish to try to remake health care only at the insurance level.

The AT&T monopoly was supported by the government. Claiming it’s breakup as an example of successful government regulation is absurd and these types of arguments are a primary reason that the more poorly-informed “anti-regulation” types are predisposed to reject pro-regulation arguments out of hand.

Most reasonable libertarian-types agree that some regulation is necessary and good. We just disagree on what that means.

The regulatory atmosphere in the US is toxic right now. Some of the best jobs in my state are being wiped out by Obama’s job killers at the EPA. This article admits that wind power is so unreliable we will have to build gas generation to back it up. Our electricity prices will skyrocket:

–Montana’s electric cooperatives will likely share in a $5 billion bill to comply with the federal Clean Power Plan, officials say.

The $5 billion is what Basin Electric Power Cooperative estimates it will need to cut greenhouse gases from its coal-fired power plants, while also adding wind farms and gas-fired generators as replacement energy sources.
–
“The bulk of our generation was built during the Fuel Use Act of 1978, when we were prohibited from building natural gas base-load facilities,” Miller said. “Despite our investing billions of dollars to maintain and make these units some of the cleanest in the country, now the EPA is essentially telling us to do the opposite — shut down coal and build wind, which needs to be backed up by peaking generation — gas.”–